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MIT Study Finds That Defense Contractors Can Adapt to Commercial Goods

CAMBRIDGE, Mass.--A study co-authored by a visiting MIT scholar has
found that, contrary to conventional wisdom, makers of military
equipment can adjust quite readily to the production of commercial
goods. In fact, because of their greater use of productivity-enhancing
technology, such firms have an advantage.

As the Cold War Ended, the manufacturing operations involved in making
military equipment and commercial goods were "believed to intersect
hardly at all," write Maryellen R. Kelley and Todd A. Watkins.

However, their analyses of 1991 data from a large sample of durable
goods companies show that there are only a few "technical and
competitive conditions separating the defense and commercial industrial

The normal practice among the majority of defense contractors in this
sector is now "commercial-military integration of production," they
wrote in a paper that appears in the April 28 issue of Science.

"Moreover, we find little difference between defense and commercial
producers in the competitive conditions they face or in the diversity of
their customers," they wrote.

Dr. Kelley is a visiting associate professor in the MIT Department of
Political Science and the Industrial Performance Center on leave from
Carnegie Mellon University. She holds the PhD (1984) from the Sloan
School of Management, a masters degree in city and regional planning
from Harvard and a BA from Brandeis University. Dr. Watkins is with the
Department of Business Economics at Lehigh University. Their study is
titled, "In From the Cold: Prospects for Conversion of the Defense
Industrial Base."

Many have argued "that defense contractors have little experience with
commercial customers and are unfit for the rigors of competitive
markers," the authors write. "As a consequence, conversion of defense
manufacturing facilities to commercial uses is expected to be costly and
have little chance for success."

However, these widely held suppositions about the singularity of defense
production and its isolation from commercial practice have not been
subject to rigorous empirical tests, Dr. Kelley and Dr. Watkins say.

"With data from our 1991 survey of US manufacturing firms from 21
durable goods industries, we demonstrate that structural and behavioral
barriers thought to divide defense contracting from commercial
manufacturing are actually quite rare," they say. "The defense
industrial base is far-reaching and substantially 'dual-use,' meeting
both commercial customers' requirements and military specifications in
the same facilities-indeed using the same equipment and workforce."

The study found only a few of the largest defense contractors are very
dependent on defense sales. Over the five-year period that ended in
1988, among the 100 largest defense prime contractors, the 67 that are
publicly traded derived only 9 percent of their total sales from defense
prime contracts, on average. Moreover, only 9 of those 67 firms had 50
percent or more of their sales coming from defense contracts during the
peak years of the military buildup.

By 1990, the typical defense contractor was not especially dependent on
the Pentagon, the authors write. "The vast majority [80.4 percent] of
establishments integrate commercial and military production in the same
facility, selling more than half of their 1990 output to commercial

The researchers conclude that commercial-military integration is not
only feasible, but is largely the normal practice now.

"The vast majority of defense contractors....manufacture military
products in the same plants with the same workers and equipment employed
in producing items for commercial customers. In fact, commercial
customers dominate the sales of most defense contractors.

"We conclude that the legacy of the 1980s defense buildup has been the
generation of an industrial complex poised to exploit certain, quite
common kinds of commercial markets-those involving customized durable
goods-in a post-Cold War era of flexible manufacturing."

Finally, the authors note that the integration of defense and commercial
manufacturing activities "may not be viewed as uniformly beneficial to
society or even to the economy as a whole. For instance, the degree of
integration we find at the end of the Cold War may reflect as much on
the weaknesses of producers in commercial markets as on the capabilities
of defense contractors or the influence of the Pentagon as an important
buyer for this sector during the 1980s."

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